Deck 14: The Federal Reserve System

Question 1

The Federal Reserve holds deposits from

A)Consumers.
B)Banks.
C)The U.S.Treasury.

Answer 1

Banks.

Question 2

Monetary policy involves the use of money and credit controls to

A)Shift the aggregate demand curve.
B)Shift the aggregate supply curve.
C)Move the economy along the aggregate demand curve.

Answer 2

Shift the aggregate demand curve.

Question 3

Members of the Federal Reserve Board of Governors are appointed for one 14-year term so that they

A)Have time to learn how the Fed operates.
B)Are more likely to make politically acceptable decisions.
C)Make their decisions based on economic,rather than political,considerations.

Answer 3

Make their decisions based on economic,rather than political,considerations.

Question 4

The Federal Reserve System was created by

A)The FDIC in 1929.
B)The Federal Reserve Act in 1913.
C)The U.S.Treasury in 1914.

Question 5

The creation of a Federal Reserve System was recommended by

A)The National Monetary Commission.
B)The U.S.Treasury.
C)A member of Congress.

Question 6

The Federal Open Market Committee includes

A)All 7 governors and 5 of the regional Reserve bank presidents.
B)5 of the governors and all of the regional Reserve bank presidents.
C)12 of the regional Reserve bank presidents plus the chairman of the Fed.

Question 7

The use of money and credit controls to achieve macroeconomic goals is

A)Fiscal policy.
B)Monetary policy.
C)Supply-side policy.

Question 8

Members of the Board of Governors are

A)Elected by the people and confirmed by the president.
B)Appointed by the president and confirmed by the Senate.
C)Selected by each new president at the same time the cabinet is chosen.

Question 9

Which of the following services is performed by the regional Federal Reserve banks?

A)Holding deposits for individuals.
B)Providing loans to individuals.
C)Providing currency to private banks.

Question 10

The current chairman of the Federal Reserve is

A)Alan Greenspan.
B)George W.Bush.
C)Ben Bernanke.

Question 11

The Federal Open Market Committee meets

A)Twice per year.
B)Every four or five weeks.
C)Every week.

Question 12

The money supply (M1)includes currency held by the public plus

A)Transactions accounts.
B)Currency held by the Fed and Treasury and transactions accounts.
C)Balances in most savings accounts and money market mutual funds.

Question 13

The Federal Open Market Committee is responsible for

A)The Fed's daily activity in financial markets.
B)Determining broad Fed policy.
C)Providing central banking services to individual banks.

Question 14

Which of the following services is performed by the regional Federal Reserve banks?

A)Holding bank reserves.
B)Bailing out or liquidating failed banks.
C)Determining open market operations.

Question 15

Currency held by the public plus balances in transactions accounts is the definition of

A)Bank surplus.
B)M1.
C)M2.

Question 16

The Board of Governors consists of

A)7 members,appointed for 14-year terms.
B)26 members,appointed for 2-year terms.
C)14 members,appointed for 7-year terms.

Question 17

Regional Fed banks

A)Hold deposits for individuals.
B)Clear checks between private banks.
C)Participate in open market operations.

Question 18

The government uses ______________ to regulate the amount of money banks lend.

A)monetary policy
B)fiscal policy
C)banking policy

Question 19

Which of the following is responsible for buying and selling government securities to influence reserves in the banking system?

A)Twelve Federal Reserve banks.
B)The executive branch of government.
C)The Federal Open Market Committee.

Question 20

Which of the following serves as the central banker for private banks in the United States?

A)The 12 Federal Reserve banks.
B)The executive branch of government.
C)The legislative branch of the government.

Question 21

Changing the reserve requirement is

A)A powerful tool that can cause abrupt changes in the money supply.
B)The most often-used tool on the part of the Fed.
C)A tool that has little impact on the money supply.

Question 22

A reduction in the discount rate

A)Signals the Federal Reserve's desire for additional credit expansion.
B)Increases the cost of borrowing reserves from the Federal Reserve.
C)Discourages banks from borrowing reserves from the Fed.

Question 23

Which of the following represents the lending capacity of an individual (nonmonopoly)bank?

A)Required reserve ratio × total deposits.
B)Total reserves - required reserves.
C)(Total reserves - required reserves)× multiplier.

Question 24

Excess reserves are

A)Legal reserves in excess of total reserves.
B)Required reserves plus minimal reserves.
C)Bank reserves in excess of required reserves.

Question 25

The Fed can use all of the following except ____________ to change the lending capacity of the banking system.

A)the reserve requirement
B)the excess reserve requirement
C)open market operations

Question 26

Suppose all of the banks in the Federal Reserve System have $100 billion in transactions accounts,the required reserve ratio is 0.25,and there are no excess reserves in the system.If the required reserve ratio is changed to 0.20,the total lending capacity of the system is increased by

A)$25 billion.
B)$20 billion.
C)$10 billion.

Question 27

Which of the following is the market where reserves can be borrowed by one bank from another bank for very short periods of time?

A)Money market.
B)Commercial paper market.
C)Federal funds market.

Question 28

Which of the following is true about an increase in the discount rate?

A)It reduces the cost of reserves borrowed from the Federal Reserve.
B)It signals the Federal Reserve's desire to restrain money growth.
C)It signals the Federal Reserve's desire to support credit creation.

Question 29

_____________ can be altered to change the lending capacity of the banking system.

A)Points charged on a typical first mortgage
B)Gold reserves
C)The reserve requirement

Question 30

Suppose the banks in the Federal Reserve System have $100 billion in transactions accounts,the required reserve ratio is 0.10,and there are no excess reserves in the system.If the required reserve ratio is changed to 0.15,the deficiency of reserves would be

A)$15 billion.
B)$20 billion.
C)$5 billion.

Question 31

When a bank borrows money from the Federal Reserve,

A)This is a sign that the bank is insolvent.
B)Demand deposits increase for the bank.
C)Reserves increase for the bank.

Question 32

The money supply (M2)includes M1 plus balances in

A)Saving accounts,money market mutual funds,and certificates of deposit over $100,000.
B)Saving accounts and money market mutual funds.
C)Saving accounts only.

Question 33

Suppose the banks in the Federal Reserve System have $200 billion in transactions accounts,the required reserve ratio is 0.15,and there are no excess reserves in the system.If the required reserve ratio is changed to 0.10,the amount of excess reserves would be

A)Negative $10 billion.
B)Negative $20 billion.
C)Positive $10 billion.

Question 34

The M2 money supply is defined as

A)Currency held by the public plus transactions accounts.
B)M1 plus savings accounts.
C)M1 plus balances in most savings accounts and money market mutual funds.

Question 35

Discounting refers to the Fed's practice of

A)Selling securities at the federal funds rate.
B)Purchasing securities at the lowest available federal funds rate.
C)Lending reserves to private banks.

Question 36

The minimum amount of reserves a bank is required to hold is

A)Required reserves.
B)Excess reserves.
C)Total reserves.

Question 37

The rate of interest charged by Federal Reserve banks for lending reserves to member banks is the

A)Federal funds rate.
B)Prime rate.
C)Discount rate.

Question 38

If excess reserves are too large,a bank is likely to

A)Buy government securities.
B)Borrow in the federal funds market.
C)Borrow reserves from the discount window.

Question 39

Which of the following represents the lending capacity of an entire banking system?

A)Required reserve ratio × total deposits.
B)Total reserves - required reserves.
C)(Total reserves - required reserves)× money multiplier.

Question 40

The federal funds rate is the interest rate charged when

A)One bank lends reserves to another bank.
B)The Fed lends to banks.
C)The Fed lends to individuals.

Question 41

The Fed can decrease the federal funds rate by

A)Selling government bonds.
B)Buying government bonds,which causes market interest rates to fall.
C)Simply announcing a lower rate because the Fed has direct control of this interest rate.

Question 42

Shoffner buys a bond in the amount of $1,000 with a promised interest rate of 18 percent.If the market interest rate decreases to 3 percent,Shoffner can sell his bond for up to

A)$5,000.
B)$6,000.
C)$3,000.

Question 43

If market interest rates rise,the selling price of existing bonds in the market will,ceteris paribus,

A)Rise.
B)Fall.
C)Not change.

Question 44

When the Fed buys bonds from the public,it

A)Decreases the flow of reserves to the banking system.
B)Increases the flow of reserves to the banking system.
C)Decreases the money supply.

Question 45

The purchase and sale of government bonds by the Fed for the purpose of altering bank reserves is known as

A)Fiscal policy.
B)Federal funds operations.
C)Open market operations.

Question 46

The Fed is most likely to pursue

A)Frequent adjustment of the reserve requirement.
B)Use of open market operations as the primary mechanism to change reserves.
C)Numerous increases in the discount rate to tighten the money supply quickly.

Question 47

Which of the following is the tool used most frequently by the Fed?

A)The reserve requirement.
B)Open market operations.
C)The discount rate.

Question 48

Which of the following is the principal mechanism used by the Federal Reserve to directly alter the reserves of the banking system?

A)Changes in the discount rate.
B)Changes in the required reserve ratio.
C)Open market operations.

Question 49

Rommel buys a bond in the amount of $2,000 with a promised interest rate of 17 percent.If the market interest rate increases to 27 percent,Rommel can sell her bond for up to

A)$1,259.26.
B)$540.00.
C)$7,407.00.

Question 50

Tony buys a bond in the amount of $500 with a promised interest rate of 15 percent.If the market interest rate decreases to 5 percent,Tony can sell his bond for up to

A)$500.
B)$250.
C)$1,500.

Question 51

Open market operations involve the Fed

A)Buying or selling government bonds.
B)Buying or selling shares of stock.
C)Borrowing money from a bank.

Question 52

If market interest rates fall,the selling price of existing bonds in the market will,ceteris paribus,

A)Rise.
B)Fall.
C)Not change.

Question 53

If the annual interest rate printed on the face of a bond is 7 percent,the face value of the bond is $1,000,and the current market price of the bond is $250,what is the current yield on the bond?

A)25 percent.
B)14 percent.
C)28 percent.

Question 54

The Fed can increase the federal funds rate by

A)Selling government bonds,which causes market interest rates to rise.
B)Buying government bonds.
C)Simply announcing a higher rate because the Fed has direct control of this interest rate.

Question 55

Through open market operations,the Fed is able to influence

A)The stock market but not the bond market.
B)Automatic stabilizers.
C)Portfolio decisions.

Question 56

By raising and lowering the discount rate,the Fed changes the

A)Level of required reserves held by individuals.
B)Incentive for banks to buy common stock.
C)Incentive for banks to borrow reserves.

Question 57

When the Fed wishes to increase the reserves of the member banks,it

A)Buys securities.
B)Raises the reserve requirement.
C)Raises the discount rate.

Question 58

The rate of return on a bond is the

A)Annual interest payment.
B)Discount rate.
C)Yield.

Question 59

If the Fed wants to sell more government bonds than people are willing to buy,then the Fed should

A)Decrease the price it asks for the bonds.
B)Switch to another type of monetary policy lever.
C)Switch to fiscal policy.

Question 60

A bond is a

A)Ownership share in a private company.
B)Promise to repay borrowed funds.
C)Certification that a bank has met the Fed's reserve requirement.

Question 61

If the required reserve ratio is 25 percent and the Federal Reserve sells $100,000 worth of bonds,the money supply can potentially

A)Decrease by $75,000.
B)Increase by $75,000.
C)Decrease by $400,000.

Question 62

If the Fed sells $10 billion of U.S.bonds in the open market and the reserve requirement is 10 percent,M1 will eventually

A)Increase by $100 billion.
B)Increase by $1 billion.
C)Decrease by $100 billion.

Question 63

If the Fed sells $7.5 billion of U.S.bonds in the open market and the reserve requirement is 15 percent,M1 will eventually

A)Decrease by $50 billion.
B)Increase by $7.5 billion.
C)Increase by $50 billion.

Question 64

Suppose the required reserve ratio is 20 percent,and the Fed buys $1 million worth of bonds from the public.If the public deposits this amount into transactions accounts,the money supply will

A)Increase directly by $1 million in reserve deposits,with an additional lending capacity of $3 million created for the banking system.
B)Increase directly by $1 million in reserve deposits,with an additional lending capacity of $4 million created for the banking system.
C)Not be affected directly,but an additional lending capacity of $5 million will be created for the banking system.

Question 65

If the Fed wants to increase the lending capacity of the system by $60 billion and the reserve requirement is 10 percent,it should

A)Buy $60 billion in bonds from banks.
B)Buy $6 billion in bonds from banks.
C)Sell $60 billion in bonds to the public.

Question 66

Assuming a reserve requirement of 10 percent,if the Fed sells $20 billion in bonds to the public,the lending capacity of the system will eventually

A)Increase by $200 billion.
B)Increase by $20 billion.
C)Decrease by $200 billion.

Question 67

Which of the following is true about the Monetary Control Act of 1980?

A)It reduced the distinction between different types of depository institutions.
B)It further restricted the Federal Reserve's control of the banking system.
C)It placed S&Ls,credit unions,mutual savings banks,and nonmember banks under regulatory institutions other than the Fed.

Question 68

The Monetary Control Act of 1980 did all of the following except

A)Create greater competition in the banking industry.
B)Grant more autonomy to small banks.
C)Give all depository institutions access to the Fed's discount window.

Question 69

If the Fed wishes to increase the money supply,it could

A)Lower the discount rate.
B)Raise the minimum reserve ratio.
C)Sell securities on the open market.

Question 70

If the required reserve ratio is 5 percent and the Federal Reserve sells $10,000 worth of bonds,the money supply can potentially

A)Decrease by $200,000.
B)Decrease by $50,000.
C)Decrease by $500.

Question 71

If the Federal Reserve buys government bonds from the public,

A)The money supply will contract.
B)Bank reserves will not change.
C)Banks will be able to make additional loans.

Question 72

Assuming a reserve requirement of 20 percent,if the Fed sells $20 billion in bonds in the open market,the lending capacity of the system will eventually

A)Increase by $100 billion.
B)Decrease by $100 billion.
C)Increase by $1 billion.

Question 73

A growing economy needs a

A)Steadily increasing supply of money to finance market exchanges.
B)Continually decreasing supply of money to finance the government's expenditures.
C)Constant supply of money to keep inflation under control.

Question 74

If the Fed buys $150 billion of U.S.bonds in the open market and the reserve requirement is 5 percent,M1 will eventually

A)Increase by $3,000 billion.
B)Decrease by $3,000 billion.
C)Increase by $300 billion.

Question 75

Which of the following is not required to satisfy Fed minimum reserve requirements?

A)Commercial banks.
B)Most credit unions.
C)Pawn shops.

Question 76

In order to decrease the money supply,the Fed can

A)Raise the reserve requirement,increase the discount rate,or sell bonds.
B)Raise the reserve requirement,increase the discount rate,or buy bonds.
C)Lower the reserve requirement,increase the discount rate,or buy bonds.

Question 77

If the Fed buys $25 billion of U.S.bonds in the open market and the reserve requirement is 20 percent,M1 will eventually

A)Increase by $25 billion.
B)Decrease by $25 billion.
C)Increase by $125 billion.

Question 78

Suppose the required reserve ratio is 10 percent,and the Fed buys $5 million worth of bonds from the public.If the public deposits this amount into transactions accounts,the money supply will

A)Increase directly by $5 million in reserve deposits,with an additional lending capacity of $40 million created for the banking system.
B)Not be affected directly,but an additional lending capacity of $50 million will be created for the banking system.
C)Increase directly by $5 million in reserve deposits,with an additional lending capacity of $45 million created for the banking system.

Question 79

Suppose the Federal Reserve System has a required reserve ratio of 0.20.If the Open Market Committee sells $10 billion of securities to the commercial banking system,then before the money multiplier takes effect,initially excess reserves

A)Decrease by $10 billion.
B)Increase by $50 billion.
C)Increase by $10 million.

Question 80

Suppose the Federal Reserve System has a required reserve ratio of 0.20 and there are no excess reserves in the system.If the Open Market Committee buys $20 million of securities from the commercial banking system,the total lending capacity of the system

A)Increases by $20 million.
B)Decreases by $20 million.
C)Increases by $100 million.